Section 125 (Flexible Benefits Plan)

An employee can reduce their taxable income and avoid paying Social Security and Medicare Tax (5.65%) and Federal Income Tax (15% to 40%) by enrolling in a company-sponsored Flexible Benefits Plan. These tax savings can apply to one or more of the following options:

Premium Conversion Accounts, or Premium Only Plans (POP), allow for the employee portion of qualifying group insurance premiums to automatically be deducted from pay with TAX-FREE dollars.

Health Care Flexible Spending Arrangements (FSA) allow employees to pay for health care expenses for themselves and their families which are not covered by health/dental/vision insurance, including dental, vision, orthodontia, etc. (even those deductibles or co-pays which are the patient’s responsibility), with TAX-FREE dollars.

Dependent Care Assistance Program (DCAP) allows you to pay for child daycare or dependent care expenses up to $5,000 per year TAX-FREE.

The money is held in the plan until you submit a request for reimbursement or your employer pays insurance premiums.
You can include expenses for your spouse if you are legally married and file a joint income tax return. You may cover your children’s expenses if you claim them as dependents on your tax return.

How You Save Taxes
When you participate in a Flexible Spending Arrangement via salary reduction, you reduce your Federal Income Tax, FICA, Social Security and Medicare, and increase your take-home pay. The money that is deposited into your Flexible Spending Arrangement comes straight out of your gross pay; therefore avoiding taxes.

The following example shows how a single person making $30,000 per year can save $1,692 in taxes annually by contributing $550 per month to an FSA.

Tax Savings Illustration

Without Flexible
Benefits Plan

With Flexible
Benefits Plan

Gross Monthly Salary

$2,500.00

$2,500.00

Qualifying Insurance Premiums

$0.00

$100.00

Qualifying Health Care Expenses

$0.00

$100.00

Qualifying Dependent Care Expenses

$0.00

$350.00

Total Qualifying Expense

$0.00

$550.00

Gross Taxable Income

$2,500.00

$1,950.00

Income Tax @20% plus F.I.C.A. @5.65%

$641.25

$500.18

Net Spendable Income

$1,858.75

$1,449.82

Post-tax Insurance Premiums

$100.00

$0.00

Post-tax Health Care Expenses

$100.00

$0.00

Post-tax Dependent Care Expenses

$350.00

$0.00

Total Post-tax Expenses

$550.00

$0.00

Net Spendable Income

$1,308.75

$1,449.82

Increase in Monthly Spendable Income

N/A

$141.07

Increase in Annual Spendable Income

N/A

$1,692.84

As you can see, with only $550 in monthly qualified expenses, by enrolling in the Plan, you would have an extra $141.07/month ($1,692.84/year) of spendable income, the amount you would otherwise be paying in taxes.

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